Taxable wages refer to the compensation paid to the employees of a company that is liable to payroll tax. The term 'wages' here includes more than just regular salary payments. However, this also includes other types of compensation or benefits given to employees and other factors to consider. It may involve leaves, apprentice and trainee wages, superannuation, bonuses and commissions, allowances, director’s fees, shares and options, fringe benefits, and termination payments as well. Keep reading to know more about which payments are taxable and exempt.
Salary or Wage
These are the regular wages—base pay and overtime—that firms give their workers in exchange for their labour. Since they constitute direct payment for services provided, they make up the majority of taxable salaries. Since these payments are considered income received through employment, they are liable to payroll tax.
Leave
The types of leaves that are taxable are sick leave, annual leave, leave loading, and long service leave.
However, there are three exceptions:
- Maternity leave
- Fire and emergency service duty
- Defense force duty
Maternity leave
This includes both maternity and adoption leave. A maximum of 14 weeks' wages are exempt from payroll tax. However, any sick leave or other type of leave taken in relation to the pregnancy or adoption of a child will not be a part of this exception and is taxable.
- For full-time employees, wages paid for up to 14 weeks of leave are exempt.
- For part-time employees, the exemption is calculated based on the equivalent of 14 weeks of full-time wages
Employers are required to receive documents that are needed as evidence for this exemption, such as a medical certificate or a statutory declaration.
In addition, options such as paternity, parental, or surrogacy leave, as well as leave for primary or secondary caregivers, are also exempt depending on the state or territory.
Fire and Emergency Service Duty
Under this category, the wages paid to emergency workers who are on voluntary duty, performing voluntary activities, are freed from tax. For example, state emergency service volunteers, volunteer marine rescue services, etc.
Yet, any wage paid for annual leave, long service leave, recreation, or sick leave will be liable to tax.
The employer must supply proof, such as records detailing the employee's length of service and precise calculations of total wages. Additionally, documentation showing the period during which the employee participated in emergency activities like bush firefighting, and/or evidence of their status as a volunteer officer, such as identification or a letter from brigade leaders, may also be required.
Defence Force Reserves Duty
Payments made to employees during their absence from regular work to serve in the Defence Force are exempt from payroll tax. To qualify for this exemption, supporting documents such as a statement or letter from the Defence Force specifying the dates of service must be provided. However, this exemption does not extend to wages given as annual leave, long service leave, recreational leave, or sick leave for the duration of the absence.
Apprentice and trainee wage
Apprentice and trainee wages are usually taxable. However, it can be exempt or have some conditions depending on the state or territory. Therefore, it should be checked with the relevant state or territory where the company pays wages.
Superannuation
Employer contributions to employees' retirement accounts are included in taxable wages. Although these payments are aimed at future financial security, they are considered part of an employee's total compensation.
Superannuation contributions that are made for an employee, director, or deemed employee are liable to tax. (Deemed employees include individuals such as contractors who, under certain tests, are treated as employees for payroll tax purposes) Superannuation is fully taxable, including the following:
- Pre-tax contributions
- Superannuation guarantee charge (or any amounts greater)
- Salary sacrifices
- Top-up contributions (made to defined benefit funds)
Allowances
These include payments made to cover certain expenses, such as travel or accommodation costs. Unless specifically exempted by tax laws, allowances are treated as taxable income because they provide financial benefits to employees.
There are different types of allowances. However, it is not the name that matters, but rather the purpose of it or what the specific allowance stands for. Some examples for allowances are given below.
- First aid allowance
- Uniform allowance
- Tool allowance
- Height allowance
It is important to know that reimbursements that an employer pays back to an employee for a business-related expense that the employee paid for personally are not taxable for payroll tax. They do not fall in the taxable category because they are not considered wages. Rather, reimbursements are business expenses. Such expenses incurred by employees should be supported with proof, such as a receipt or claim, and the amount should be paid back.
Motor vehicle allowance and accommodation allowance are special cases that needs to be discussed.
Motor Vehicle Allowance
The motor vehicle allowance can be exempt up to a certain limit. However, this is only if certain conditions are met. Those conditions are mentioned below.
- It must be the worker's personal vehicle, which they either own or lease.
- The travel should only be for business purposes.
- Travel for a long distance needs to be verified by log books, diary entries, or expense claim forms.
The exempt rate is prescribed under the income tax legislation. If the allowance is paid during this year, the ATO’s (Australian Taxation Office) rate from the previous year should be used. The cents per kilometre method is used to calculate the deductions. Therefore, the exemption is equal to the number of kilometres multiplied by the rate. After subtracting the exempt amount, the rest of the allowance amount is liable to tax. The exempt rate per km for the relevant financial year should be checked on the relevant revenue office website. Employers should confirm the current ATO rate or any state-specific variation to calculate the exempt portion accurately.
Accommodation Allowance
Accommodation allowances may be exempt from payroll tax up to a specified threshold. An accommodation allowance included three parts: room, meals, and incidentals. This exemption only applies if the amount is paid to the employee. However, if the company separately arranges the accommodation, only the meals and incidentals are eligible for the exemption.
Moreover, the amount an employee spends from his or her own money, which is repaid after verifying through a receipt, is not liable for tax. The accommodation is allowed up to 21 days, and if further accommodation is required, employees must arrange a domestic dwelling for themselves. The 21-day exemption rule typically applies per work location. After this, it may be considered a “living-away-from-home” allowance, which may or may not be exempt depending on how it's structured.The rates used to calculate the exempt component of an accommodation allowance should be checked on the relevant revenue office website.
Directors fees
Directors’ fees are also considered wages and are liable to payroll tax. Directors’ fees are usually directly paid to the director or, if not, to a director’s trust or a company. They could be paid to a working or non-working director. However, none of these variations matter. Therefore, directors’ fees should be declared for payroll tax in all of these situations.
It is important to distinguish between the wages or fees paid to a director and the payments made to them as owners of the business. (Profit distributions are not wages and thus not taxable)
Bonuses and Commissions
These extra payments are given to staff members as incentives or rewards for reaching predetermined performance targets, especially exceeding them or closing deals. Bonuses and commissions may also be used to share the employer’s recent financial success with the employees. They are liable to payroll tax since they are a type of payment for labour, work, and effort put in to achieve objectives. Commissions are considered taxable wages, regardless of whether they are provided in addition to the base salary or are the only payments made to an employee.
Shares and Options
The shares and options provided to employees are also considered taxable wages. The shares or options can also be provided to deemed employees, such as contractors, directors, or former directors of the company. The value of shares or options should align with the market value or amount determined by the income tax assessment.
The grant of a share or options means that someone acquires a share granted by the employer or, in the case of an option, has a right to the share. The value of the share or option on the relevant day is taken as its value for the purpose of payroll tax. The employer can decide the relevant day as either the date that the share or option is granted to the employee or the vesting date.
Fringe Benefits
In Australia, fringe benefits are non-cash perks that firms offer to workers, their families, or coworkers on top of their pay. Fringe benefits are taxable even though they are not paid as cash wages since they are a component of an employee's overall compensation package. The taxable value of the benefit is used to determine the fringe benefit tax (FBT), which is paid by the employers. A few examples of fringe benefits are:
- Enabling workers to utilise a company vehicle for personal travel
- Covering the cost of gym memberships for staff members.
- Paying back costs such as school tuition.
- Providing loans at a reduced rate.
If any benefit is taxable under the Fringe Benefits Tax Assessment Act, it is also liable for payroll tax. Similarly, the benefit types that are exempt under the Fringe Benefits Tax Assessment are also free from payroll tax. This therefore indicates that the information on fringe benefits tax can be used for the payroll tax declarations. These two taxes are closely aligned. However, it is important to check with the relevant state or territory, as certain fringe benefits may not be taxable. Not all fringe benefits are reported at their full taxable value for payroll tax. Some may be grossed up using different rates.
Termination Payments
Taxable wages include payments like severance pay, compensation for unused leave, pay in lieu of notice, contract payouts, and golden handshakes that are paid to workers when their employment ends. This can be an instance of a resignation, retirement, redundancy, or death. Usually, the employee's service history and accumulated benefits are used to determine these payments.
There are two exceptions under termination payments that are not taxable.
- The tax-free part of a genuine redundancy payment
- An early retirement scheme payment
Worker’s compensation
Payroll tax does not apply to workers' compensation payments provided in compliance with the Workplace Injury Management and Workers' Compensation Act. This holds true regardless of whether the employer or the insurer makes the payment to the worker.
If the compensation amount is less than the employee's usual pay, an extra amount is paid to make up the shortfall. Payroll tax applies to these additional payments, such as top-ups or make-up payments and not to the statutory benefit itself.
Summary
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Taxable Wages |
Exempt or Non-Taxable Wages |
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Conclusion
In summary, companies must comprehend and distinguish between taxable wages, non-taxable wages, and exempt components in order to stay in compliance and avoid mistakes that can lead to overpayments, underpayments, or fines. In addition to legal compliance, expertise in these fields lays the groundwork for long-term success and growth. Proactive payroll tax administration promotes transparent financial management and builds confidence with both regulatory bodies and employees.
